18.

317: Introduction to Quantitative Methods in Economics Final Exam Sisir Sarma

The University of Manitoba

Department of Economics
18.317: Introduction to Quantitative Methods in Economics
Intersession (May 3 - May 26, 2004)
Final Exam (Answer Keys)

Section I (20 points)

Multiple Choice Questions

1. c 5. b 9. a
2. a 6. c 10. a
3. d 7. a
4. d 8. c

Section III (60 points)

Problem Solving Questions

Q1.
a) E (Y ) = 0.547 . 54.7 percent of the quarters saw cyclical unemployment. E ( X ) = 0.461 . 46.1
percent of the quarters saw decreasing inflation rates.

b) E (Y | X = 1) = 0.356 ; E (Y | X = 0) = 0.711 . You would expect the two conditional expectations

to be the same. In general, independence in means does not imply statistical independence,
although the reverse is true.

c) There is a 34.4 percent probability of inflation to increase if there is positive cyclical

unemployment. There is a 70 percent probability of inflation to increase if there is negative
cyclical unemployment.

Q2.
a) The expected value is µ, and the variance is µ*(1- µ).

b) The estimate of µ is 18/50=0.36. The estimated variance is equal to 0.2304.

c) The standard deviation of the estimated µ is the estimated standard deviation of Q divided by the
square root of 50. This is equal to 0.0682. The critical Z value is 1.645. The rejection region is
below 0.188 or above 0.412. We fail to reject the null hypothesis.

d) In this case, the standard deviation of the estimate is the square root of 0.21 divided by the square
root of 50, the critical value is 1.645, the variance is 0.21 and the rejection region is below 0.193 or
above 0.4067. We again fail to reject the null hypothesis. The second test is more powerful; its

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18.317: Introduction to Quantitative Methods in Economics Final Exam Sisir Sarma

rejection region contains the rejection region of the first test, so it will reject more often than the
first one will when the null hypothesis is false.

Q3.
a) If adults trade off sleep for work, more work implies less sleep (other things equal), so β1 < 0.
The signs of β 2 and β 3 are not obvious! One could argue that more educated people like to get
more out of life, and so, other things equal, they sleep less ( β 2 < 0). The relationship between
sleeping and age is more complicated than this model suggests, and economists are not in the best
position to judge such things.

b) Since totwrk is in minutes, we must convert five hours into minutes: ∆totwrk = 5(60) = 300.
Then sleep is predicted to fall by .148(300) = 44.4 minutes. Not surprisingly, the three explanatory
variables explain only about 11.3% of the variation in sleep.
c) With df = 706 – 4 = 702, we use the standard normal critical value (df = ∞ in ), which is 1.96 for
a two-tailed test at the 5% level. Now teduc = −11.13/5.88 ≈ −1.89, so |teduc| = 1.89 < 1.96, and we
fail to reject H0: β educ = 0 at the 5% level. Also, tage ≈ 1.52, so age is also statistically insignificant
at the 5% level.

d) We need to compute the R-squared form of the F statistic for joint significance. F = [(.113 −
.103)/(1 − .113)](702/2) ≈ 3.96. The 5% critical value in the F2,702 distribution is = 3.00.
Therefore, educ and age are jointly significant at the 5% level (3.96 > 3.00).

Q4.
a. i) β 1 = − β 2 ; β 3 = 0
The restricted model is Yi = β 0 + β 2 ( X 2i − X 1i ) + ui and the rule-of-thumb F-statistic would
( SSRrestricted − SSRunrestricted ) / 2
be F = .
SSRunrestricted / n − 3 − 1)
a. ii) β 1 + β 2 + β 3 = 1
(Yi − X 3i ) = β 0 + β1 ( X 1i − X 3i ) + β 2 ( X 2i − X 3i ) + ui and the rule-of-thumb F-statistic would be
( SSRrestricted − SSRunrestricted ) /1
F=
SSRunrestricted / n − 3 − 1)
b. i) F(3,149) = 2.66 (5% level), F(3,149) = 3.91 (1% level). Reject the null hypothesis at the
5% level, but not at the 1% level.
b. ii) F(7,∞) = 2.01 (5% level), F(7,∞) = 2.64 (1% level). Reject the null hypothesis at the 5%
level and at the 1% level.
b. iii) F(1,63) = 3.99 (5% level), F(1,63) = 7.04 (1% level). Cannot reject the null hypothesis at
the 5% level or at the 1% level.
b. iv) F(5,∞) = 2.21 (5% level), F(5,∞) = 3.02 (1% level). Cannot reject the null hypothesis at
the 5% level or at the 1% level.

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18.317: Introduction to Quantitative Methods in Economics Final Exam Sisir Sarma

Q5.
a) For every one inch increase in the average height of their parents, the student’s height
increases by 0.73 of an inch. There is no interpretation for the intercept.
b) H 0 : β 0 = 0 , t=2.72, for H1 : β 0 ≠ 0 , the critical value for a two-sided alternative is 2.58.
Hence we reject the null hypothesis in (i). For the slope we have H 0 : β1 = 1 , t=-2.70, for
H1 : β1 ≠ 1 , the critical value for a two-sided alternative is 2.58. Hence we reject the null
hypothesis in (ii).
c) 19.6 + 0.73× 70.06 = 70.74
d) (0.73 – 1.96× 0.10, 0.73 + 1.96× 0.10) = (0.53, 0.93).

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